Utility-Maximizing Rule

Consumer Equilibrium

When the consumer has "balanced his margins" using the Utility-Maximizing rule, he has achieved consumer equilibrium and has no incentive to alter his expenditure pattern. In fact, any person who has achieved consumer equilibrium would be worse off—total utility would decline—if there were any alteration in the bundle of goods purchased, providing there is no change in taste, income, products, or prices.

substitution effect

behavioral economics

the branch of economics that combines insights from economics, psychology, and neuroscience to better understand those situations in which actual choice behavior deviates from the predictions made by earlier theories, which incorrectly concluded that people were always rational, deliberate, and unswayed by emotions

Three Behavioral Economics Facts About People

1. People judge good things and bad things in relative terms, as gains and losses relative to their current situation, or status quo.
2. People experience both diminishing marginal utility for gains (as you have already seen) as well as diminishing marginal disutility for losses (meaning that each successive unit of loss hurts, but less painfully than the previous unit).
3. People are loss averse, meaning that for losses and gains near the status quo, losses are felt much more intensely than gains—in fact, about 2.5 times more intensely. Thus, for instance, the pain experienced by an investor who loses one dollar from his current status quo level of wealth will be about 2.5 times more intense than the pleasure he would have felt if he had gained one dollar relative to his current level of wealth.

endowment effect

utility-maximization model

assumes that the typical consumer is rational and acts on the basis of well-defined preferences. Because income is limited and goods have prices, the consumer cannot purchase all the goods and services he or she might want. The consumer therefore selects the attainable combination of goods that maximizes his or her utility or satisfaction.

economic cost

explicit costs

the monetary payments it makes to those from whom it must purchase resources that it does not own. Because these costs involve an obvious cash transaction, they are referred to as explicit costs. Be sure to remember that explicit costs are opportunity costs because every monetary payment used to purchase outside resources necessarily involves forgoing the best alternatives that could have been purchased with the money.

implicit costs

the opportunity costs of using the resources that it already owns to make the firm's own product rather than selling those resources to outsiders for cash. Because these costs are present but not obvious, they are referred to as implicit costs.

Total product (TP)

Marginal product (MP)

the extra output or added product associated with adding a unit of a variable resource, in this case labor, to the production process. Thus, Marginal Product= change in total product/change in labor input

Average product (AP),

law of diminishing returns

This law assumes that technology is fixed and thus the techniques of production do not change. It states that as successive units of a variable resource (say, labor) are added to a fixed resource (say, capital or land), beyond some point the extra, or marginal, product that can be attributed to each additional unit of the variable resource will decline

marginal decisions

diseconomies of scale

constant returns to scale

In some industries a rather wide range of output may exist between the output at which economies of scale end and the output at which diseconomies of scale begin. That is, there may be a range of constant returns to scale over which long-run average cost does not change

natural monopoly

Pure competition

involves a very large number of firms producing a standardized product (that is, a product like cotton, for which each producer's output is virtually identical to that of every other producer.) New firms can enter or exit the industry very easily

Pure monopoly

a market structure in which one firm is the sole seller of a product or service (for example, a local electric utility). Since the entry of additional firms is blocked, one firm constitutes the entire industry. The pure monopolist produces a single unique product, so product differentiation is not an issue.

Monopolistic competition

characterized by a relatively large number of sellers producing differentiated products (clothing, furniture, books). Present in this model is widespread nonprice competition, a selling strategy in which a firm does not try to distinguish its product on the basis of price but instead on attributes like design and workmanship (an approach called product differentiation). Either entry to or exit from monopolistically competitive industries is quite easy

Oligopoly

involves only a few sellers of a standardized or differentiated product, so each firm is affected by the decisions of its rivals and must take those decisions into account in determining its own price and output

imperfect competition

Very large numbers

A basic feature of a purely competitive market is the presence of a large number of independently acting sellers, often offering their products in large national or international markets. Examples: markets for farm commodities, the stock market, and the foreign exchange market.

Standardized product

Purely competitive firms produce a standardized (identical or homogeneous) product. As long as the price is the same, consumers will be indifferent about which seller to buy the product from. Buyers view the products of firms B, C, D, and E as perfect substitutes for the product of firm A. Because purely competitive firms sell standardized products, they make no attempt to differentiate their products and do not engage in other forms of nonprice competition

"Price takers"

In a purely competitive market, individual firms do not exert control over product price. Each firm produces such a small fraction of total output that increasing or decreasing its output will not perceptibly influence total supply or, therefore, product price. In short, the competitive firm is a price taker: It cannot change market price; it can only adjust to it. That means that the individual competitive producer is at the mercy of the market. Asking a price higher than the market price would be futile. Consumers will not buy from firm A at $2.05 when its 9999 competitors are selling an identical product, and therefore a perfect substitute, at $2 per unit. Conversely, because firm A can sell as much as it chooses at $2 per unit, it has no reason to charge a lower price, say, $1.95. Doing that would shrink its profit

Free entry and exit

New firms can freely enter and existing firms can freely leave purely competitive industries. No significant legal, technological, financial, or other obstacles prohibit new firms from selling their output in any competitive market

Marginal revenue

break-even point

Identical costs

All firms in the industry have identical cost curves. This assumption lets us discuss an "average," or "representative," firm, knowing that all other firms in the industry are similarly affected by any long-run adjustments that occur.

Constant-cost industry

The industry is a constant-cost industry. This means that the entry and exit of firms does not affect resource prices or, consequently, the locations of the average-total-cost curves of individual firms.

constant-cost industry

This means that industry expansion or contraction will not affect resource prices and therefore production costs. Graphically, it means that the entry or exit of firms does not shift the long-run ATC curves of individual firms.

increasing-cost industries

ATC curves shift upward as the industry expands and downward as the industry contracts. Usually, the entry of new firms will increase resource prices, particularly in industries using specialized resources whose long-run supplies do not readily increase in response to increases in resource demand. Higher resource prices result in higher long-run average total costs for all firms in the industry. These higher costs cause upward shifts in each firm's long-run ATC curve.

decreasing-cost industries

Productive efficiency

requires that goods be produced in the least costly way. In the long run, pure competition forces firms to produce at the minimum average total cost of production and to charge a price that is just consistent with that cost. This is true because firms that do not use the best available (least-cost) production methods and combinations of inputs will not survive.

consumer surplus

producer surplus

the difference between the minimum prices that producers are willing to accept for a product (as shown by the supply curve) and the market price of the product. Producer surplus is the sum of the vertical distances between the equilibrium price and the supply curve

the main characteristics of pure monopoly:

1. Single seller A pure, or absolute, monopoly is an industry in which a single firm is the sole producer of a specific good or the sole supplier of a service; the firm and the industry are synonymous.
2. No close substitutes A pure monopoly's product is unique in that there are no close substitutes. The consumer who chooses not to buy the monopolized product must do without it.
3. Price maker The pure monopolist controls the total quantity supplied and thus has considerable control over price; it is a price maker (unlike a pure competitor, which has no such control and therefore is a price taker). The pure monopolist confronts the usual downsloping product demand curve. It can change its product price by changing the quantity of the product it produces. The monopolist will use this power whenever it is advantageous to do so.
4. Blocked entry A pure monopolist has no immediate competitors because certain barriers keep potential competitors from entering the industry. Those barriers may be economic, technological, legal, or of some other type. But entry is totally blocked in pure monopoly.
5. Nonprice competition The product produced by a pure monopolist may be either standardized (as with natural gas and electricity) or differentiated (as with Windows or Frisbees). Monopolists that have standardized products engage mainly in public relations advertising, whereas those with differentiated products sometimes advertise their products' attributes.

price discrimination,

Price discrimination can take three forms

1. Charging each customer in a single market the maximum price she or he is willing to pay.
2. Charging each customer one price for the first set of units purchased and a lower price for subsequent units purchased.
3. Charging some customers one price and other customers another price

Monopoly power

Market segregation

At relatively low cost to itself, the seller must be able to segregate buyers into distinct classes, each of which has a different willingness or ability to pay for the product. This separation of buyers is usually based on different price elasticities of demand, as the examples below will make clear.

No resale

The original purchaser cannot resell the product or service. If buyers in the low-price segment of the market could easily resell in the high-price segment, the monopolist's price-discrimination strategy would create competition in the high-price segment. This competition would reduce the price in the high-price segment and undermine the monopolist's price-discrimination policy. This condition suggests that service industries such as the transportation industry or legal and medical services, where resale is impossible, are good candidates for price discrimination.

No collusion

Independent action

With numerous firms in an industry, there is no feeling of interdependence among them; each firm can determine its own pricing policy without considering the possible reactions of rival firms. A single firm may realize a modest increase in sales by cutting its price, but the effect of that action on competitors' sales will be nearly imperceptible and will probably trigger no response.

product differentiation

Monopolistically competitive firms turn out variations of a particular product. They produce products with slightly different physical characteristics, offer varying degrees of customer service, provide varying amounts of locational convenience, or proclaim special qualities, real or imagined, for their products.

strategic behavior

mutual interdependence

a situation in which each firm's profit depends not just on its own price and sales strategies but also on those of the other firms in its highly concentrated industry. So oligopolistic firms base their decisions on how they think their rivals will react.

game theory

collusion

Diversity of oligopolies

Oligopoly encompasses a greater range and diversity of market situations than do other market structures. It includes the tight oligopoly, in which two or three firms dominate an entire market, and the loose oligopoly, in which six or seven firms share, say, 70 or 80 percent of a market while a "competitive fringe" of firms shares the remainder. It includes both differentiated and standardized products. It includes cases in which firms act in collusion and those in which they act independently. It embodies situations in which barriers to entry are very strong and situations in which they are not quite so strong. In short, the diversity of oligopoly does not allow us to explain all oligopolistic behaviors with a single market model

Complications of interdependence

The mutual interdependence of oligopolistic firms complicates matters significantly. Because firms cannot predict the reactions of their rivals with certainty, they cannot estimate their own demand and marginal-revenue data. Without such data, firms cannot determine their profit-maximizing price and output, even in theory, as we will see

cartel

Price leadership

a type of implicit understanding by which oligopolists can coordinate prices without engaging in outright collusion based on formal agreements and secret meetings. Rather, a practice evolves whereby the "dominant firm"—usually the largest or most efficient in the industry—initiates price changes and all other firms more or less automatically follow the leader

Demand

a schedule or a curve that shows the various amounts of a product that consumers are willing and able to purchase at each of a series of possible prices during a specified period of time.1 Demand shows the quantities of a product that will be purchased at various possible prices, other things equal. Demand can easily be shown in table form

law of demand.

A fundamental characteristic of demand is this: Other things equal, as price falls, the quantity demanded rises, and as price rises, the quantity demanded falls. In short, there is a negative or inverse relationship between price and quantity demanded

substitution effect

suggests that at a lower price buyers have the incentive to substitute what is now a less expensive product for other products that are now relatively more expensive. The product whose price has fallen is now "a better deal" relative to the other products

demand curve

The inverse relationship between price and quantity demanded for any product can be represented on a simple graph, in which, by convention, we measure quantity demanded on the horizontal axis and price on the vertical axis.

determinants of aggregate supply

Number of Buyers

An increase in the number of buyers in a market is likely to increase demand; a decrease in the number of buyers will probably decrease demand. For example, the rising number of older persons in the United States in recent years has increased the demand for motor homes, medical care, and retirement communities.

normal goods

For most products, a rise in income causes an increase in demand. Consumers typically buy more steaks, furniture, and electronic equipment as their incomes increase. Conversely, the demand for such products declines as their incomes fall. Products whose demand varies directly with money income are called superior goods, or normal goods

inferior goods

As incomes increase beyond some point, the demand for used clothing, retread tires, and third-hand automobiles may decrease, because the higher incomes enable consumers to buy new versions of those products. Rising incomes may also decrease the demand for soy-enhanced hamburger. Similarly, rising incomes may cause the demand for charcoal grills to decline as wealthier consumers switch to gas grills. Goods whose demand varies inversely with money income are called inferior goods

substitute good

complementary good

Increase in demand may be caused by.....

1. A favorable change in consumer tastes.
2. An increase in the number of buyers.
3. Rising incomes if the product is a normal good.
4. Falling incomes if the product is an inferior good.
5. An increase in the price of a substitute good.
6. A decrease in the price of a complementary good.
7. A new consumer expectation that either prices or income will be higher in the future

change in demand

change in quantity demanded

a movement from one point to another point—from one price-quantity combination to another—on a fixed demand curve. The cause of such a change is an increase or decrease in the price of the product under consideration

law of supply

determinants of supply

(1) resource prices, (2) technology, (3) taxes and subsidies, (4) prices of other goods, (5) producer expectations, and (6) the number of sellers in the market. A change in any one or more of these determinants of supply, or supply shifters, will move the supply curve for a product either right or left.

change in supply

The distinction between a change in supply and a change in quantity supplied parallels the distinction between a change in demand and a change in quantity demanded. Because supply is a schedule or curve, a change in supply means a change in the schedule and a shift of the curve. An increase in supply shifts the curve to the right; a decrease in supply shifts it to the left. The cause of a change in supply is a change in one or more of the determinants of supply.

price floor

The government may cope with the surplus resulting from a price floor in two ways......

.......It can restrict supply (for example, by instituting acreage allotments by which farmers agree to take a certain amount of land out of production) or increase demand (for example, by researching new uses for the product involved). These actions may reduce the difference between the equilibrium price and the price floor and that way reduce the size of the resulting surplus.
If these efforts are not wholly successful, then the government must purchase the surplus output at the $3 price (thereby subsidizing farmers) and store or otherwise dispose of it.

price elasticity of demand.

For some products—for example, restaurant meals—consumers are highly responsive to price changes. Modest price changes cause very large changes in the quantity purchased. Economists say that the demand for such products is relatively elastic or simply elastic.

unit elasticity

perfectly inelastic demand

Product or resource demand in which price can be of any amount at a particular quantity of the product or resource demanded; quantity demanded does not respond to a change in price; graphs as a vertical demand curve

Antitrust laws

Sherman Act of 1890

This cornerstone of antitrust legislation is surprisingly brief and, at first glance, directly to the point. The core of the act resides in two provisions:
Section 1 "Every contract, combination in the form of a trust or otherwise, or conspiracy, in restraint of trade or commerce among the several States, or with foreign nations is declared to be illegal."
Section 2 "Every person who shall monopolize, or attempt to monopolize, or combine or conspire with any person or persons, to monopolize any part of the trade or commerce among the several states, or with foreign nations, shall be deemed guilty of a felony" (as later amended from "misdemeanor").

The Sherman Act thus outlawed......

The Clayton Act of 1914

contained the desired elaboration of the Sherman Act. Four sections of the act, in particular, were designed to strengthen and make explicit the intent of the Sherman Act:
Section 2 outlaws price discrimination when such discrimination is not justified on the basis of cost differences and when it reduces competition.
Section 3 prohibits tying contracts, in which a producer requires that a buyer purchase another (or others) of its products as a condition for obtaining a desired product.
Section 7 prohibits the acquisition of stocks of competing corporations when the outcome would be less competition.
Section 8 prohibits the formation of interlocking directorates—situations where a director of one firm is also a board member of a competing firm—in large corporations where the effect would be reduced competition.

Federal Trade Commission Act

created the five-member Federal Trade Commission (FTC), which has joint Federal responsibility with the U.S. Justice Department for enforcing the antitrust laws. The act gave the FTC the power to investigate unfair competitive practices on its own initiative or at the request of injured firms.

Wheeler-Lea Act of 1938

amended the Federal Trade Commission Act to give the FTC the additional responsibility of policing "deceptive acts or practices in commerce." In so doing, the FTC tries to protect the public against false or misleading advertising and the misrepresentation of products. So the Federal Trade Commission Act, as modified by the Wheeler-Lea Act, (1) established the FTC as an independent antitrust agency and (2) made unfair and deceptive sales practices illegal.

Celler-Kefauver Act

amended the Clayton Act, Section 7, which prohibits a firm from merging with a competing firm (and thereby lessening competition) by acquiring its stock. Firms could evade Section 7, however, by instead acquiring the physical assets (plant and equipment) of competing firms. The Celler-Kefauver Act closed that loophole by prohibiting one firm from obtaining the physical assets of another firm when the effect would be reduced competition

1911 Standard Oil case

1920 U.S. Steel case

the courts established the so-called rule of reason, under which not every monopoly is illegal. Only monopolies that "unreasonably" restrain trade violate Section 2 of the Sherman Act and are subject to antitrust action. Size alone is not an offense. Under the rule of reason, U.S. Steel was innocent of "monopolizing" because it had not resorted to illegal acts against competitors in obtaining and then maintaining its monopoly power. Unlike Standard Oil, which was a so-called bad trust, U.S. Steel was a "good trust" and therefore not in violation of the law.

Alcoa case of 1945

the courts touched off a 20-year turnabout. The Supreme Court sent the case to the U.S. court of appeals in New York because four of the Supreme Court justices had been involved with litigation of the case before their appointments. Led by Judge Learned Hand, the court of appeals held that, even though a firm's behavior might be legal, the mere possession of monopoly power (Alcoa held 90 percent of the aluminum ingot market) violated the antitrust laws. So Alcoa was found guilty of violating the Sherman Act

"Structuralists".....

assume that any firm with a very high market share will behave like a monopoly. As a result, they assert that any firm with a very high market share is a legitimate target for antitrust action. Structuralists argue that changes in the structure of an industry, say, by splitting the monopolist into several smaller firms, will improve behavior and performance

"Behavioralists"

assert that the relationship among structure, behavior, and performance is tenuous and unclear. They feel a monopolized or highly concentrated industry may be technologically progressive and have a good record of providing products of increasing quality at reasonable prices. If a firm has served society well and has engaged in no anticompetitive practices, it should not be accused of antitrust violation just because it has an extraordinarily large market share. That share may be the product of superior technology, superior products, and economies of scale.

natural monopoly

public interest theory of regulation

industrial regulation is necessary to keep a natural monopoly from charging monopoly prices and thus harming consumers and society. The goal of such regulation is to garner for society at least part of the cost reductions associated with natural monopoly while avoiding the restrictions of output and high prices associated with unregulated monopoly. If competition is inappropriate or impractical, society should allow or even encourage a monopoly but regulate its prices. Regulation should then be structured so that ratepayers benefit from the economies of scale—the lower per-unit costs—that natural monopolists are able to achieve

legal cartel theory of regulation

In place of having socially minded officials forcing regulation on natural monopolies to protect consumers, holders of this view see practical politicians "supplying" regulation to local, regional, and national firms that fear the impact of competition on their profits or even on their long-term survival.

Natural monopoly occurs .......

The public interest theory of regulation says that government ............

.........must regulate natural monopolies to prevent abuses arising from monopoly power. Regulated firms, however, have less incentive than competitive firms to reduce costs. That is, regulated firms tend to be X-inefficient

Critics of social regulation say........

National income accounting

The Bureau of Economic Analysis (BEA), an agency of the Commerce Department, compiles the National Income and Product Accounts (NIPA) for the U.S. economy. This accounting enables economists and policymakers to:
Assess the health of the economy by comparing levels of production at regular intervals.
Track the long-run course of the economy to see whether it has grown, been constant, or declined.
Formulate policies that will safeguard and improve the economy's health.

To measure aggregate output accurately, all goods and services produced in a particular year must be counted......

GDP includes only the market value of final goods and ignores........

Value added

the market value of a firm's output less the value of the inputs the firm has bought from others. At each stage, the difference between what a firm pays for inputs and what it receives from selling the product made from those inputs is paid out as wages, rent, interest, and profit

Public transfer payments

These are the social security payments, welfare payments, and veterans' payments that the government makes directly to households. Since the recipients contribute nothing to current production in return, to include such payments in GDP would be to overstate the year's output.

Private transfer payments

Such payments include, for example, the money that parents give children or the cash gifts given during the holidays. They produce no output. They simply transfer funds from one private individual to another and consequently do not enter into GDP

Stock market transactions

The buying and selling of stocks (and bonds) is just a matter of swapping bits of paper. Stock market transactions create nothing in the way of current production and are not included in GDP. Payments for the services provided by a stockbroker are included, however, because their services are currently provided and are thus a part of the economy's current output of goods and services

When gross investment exceeds depreciation during a year......

When gross investment and depreciation are equal......

government purchases

officially labeled "government consumption expenditures and gross investment." These expenditures have two components: (1) expenditures for goods and services that government consumes in providing public services and (2) expenditures for publicly owned capital such as schools and highways, which have long lifetimes. Government purchases (Federal, state, and local) include all government expenditures on final goods and all direct purchases of resources, including labor. It does not include government transfer payments because, as we have seen, they merely transfer government receipts to certain households and generate no production of any sort. National income accountants use the symbol G to signify government purchases.

net exports

taxes on production and imports

national income

the total of all sources of private income (employee compensation, rents, interest, proprietors' income, and corporate profits) plus government revenue from taxes on production and imports. National income is all the income that flows to American-supplied resources, whether here or abroad, plus taxes on production and imports

The economy's stock of private capital expands when net investment is positive; stays constant when net investment is zero; and declines....

net domestic product (NDP):

NDP is simply GDP adjusted for depreciation. It measures the total annual output that the entire economy—households, businesses, government, and foreigners—can consume without impairing its capacity to produce in ensuing years

real GDP.

price index

a measure of the price of a specified collection of goods and services, called a "market basket," in a given year as compared to the price of an identical (or highly similar) collection of goods and services in a reference year. That point of reference, or benchmark, is known as the base period, base year, or simply, the reference year.

Economists define and measure economic growth as either....

rule of 70

provides a quantitative grasp of the effect of economic growth. The rule of 70 tells us that we can find the number of years it will take for some measure to double, given its annual percentage increase, by dividing that percentage increase into the number 70.

Substantial differences in GDP per capita among technologically advanced leader countries are often caused by.......

Strong property rights

These appear to be absolutely necessary for rapid and sustained economic growth. People will not invest if they believe that thieves, bandits, or a rapacious and tyrannical government will steal their investments or their expected returns.

Patents and copyrights

These are necessary if a society wants a constant flow of innovative new technologies and sophisticated new ideas. Before patents and copyrights were first issued and enforced, inventors and authors usually saw their ideas stolen before they could profit from them. By giving inventors and authors the exclusive right to market and sell their creations, patents and copyrights give a strong financial incentive to invent and create.

Efficient financial institutions

These are needed to channel the savings generated by households toward the businesses, entrepreneurs, and inventors that do most of society's investing and inventing. Banks as well as stock and bond markets appear to be institutions crucial to modern economic growth.

Literacy and widespread education

Free trade

Free trade promotes economic growth by allowing countries to specialize so that different types of output can be produced in the countries where they can be made most efficiently. In addition, free trade promotes the rapid spread of new ideas so that innovations made in one country quickly spread to other countries

A competitive market system

Under a market system, prices and profits serve as the signals that tell firms what to make and how much of it to make. Rich leader countries vary substantially in terms of how much government regulation they impose on markets, but in all cases, firms have substantial autonomy to follow market signals in deciding on current production and in making investments to produce what they believe consumers will demand in the future.

Four of the determinants of economic growth relate to the physical ability of the economy to expand. They are:

1. Increases in the quantity and quality of natural resources.
2. Increases in the quantity and quality of human resources.
3. Increases in the supply (or stock) of capital goods.
4. Improvements in technology.

supply factors

The fifth determinant of economic growth is the.....

........demand factor. To achieve the higher production potential created by the supply factors, households, businesses, and government must purchase the economy's expanding output of goods and services.

The determinants of economic growth include four supply factors (increases in the quantity and quality of natural resources, increases in the quantity and quality of human resources, increases in the stock of capital goods, and improvements in technology); one demand factor (increases in total spending); and...

Frictional Unemployment

Structural Unemployment

Cyclical Unemployment

Unemployment that is caused by a decline in total spending is called cyclical unemployment and typically begins in the recession phase of the business cycle. As the demand for goods and services decreases, employment falls and unemployment rises

Consumer Price Index (CPI),

deflation

demand-pull inflation

When resources are already fully employed, the business sector cannot respond to excess demand by expanding output. So the excess demand bids up the prices of the limited output, producing demand-pull inflation. The essence of this type of inflation is "too much spending chasing too few goods."

cost-push inflation

The theory of cost-push inflation explains rising prices in terms of factors that raise per-unit production costs at each level of spending. A per-unit production cost is the average cost of a particular level of output

An increase in aggregate demand is shown as a rightward shift of the ........

Aggregate supply

a schedule or curve showing the relationship between a nation's price level and the amount of real domestic output that firms in the economy produce. This relationship varies depending on the time horizon and how quickly output prices and input prices can change

budget deficit

contractionary fiscal policy

When demand-pull inflation occurs, a restrictive or contractionary fiscal policy may help control it. This policy consists of government spending reductions, tax increases, or both, designed to decrease aggregate demand and therefore lower or eliminate inflation.

Contractionary fiscal policy entails decreases in government spending, increases in taxes, or both, and is designed to reduce .....

To be implemented correctly, contractionary fiscal policy must properly account for the ratchet effect and the fact that the price level will not fall as the government shifts the aggregate demand curve ......

built-in stabilizer

anything that increases the government's budget deficit (or reduces its budget surplus) during a recession and increases its budget surplus (or reduces its budget deficit) during an expansion without requiring explicit action by policymakers

In a proportional tax system.....

In a regressive tax system.....

cyclically adjusted budget

The cyclically adjusted budget measures what the Federal budget deficit or surplus would have been under existing tax rates and government spending levels if the economy had achieved its full-employment level of GDP (its potential output). The idea essentially is to compare actual government expenditures with the tax revenues that would have occurred if the economy had achieved full-employment GDP. That procedure removes budget deficits or surpluses that arise simply because of cyclical changes in GDP and thus tell us nothing about whether the government's current discretionary fiscal policy is fundamentally expansionary, contractionary, or neutral.

token money

money market deposit account (MMDA)

time deposits

become available at their maturity. For example, a person can convert a 6-month time deposit ("certificate of deposit," or "CD") to currency without penalty 6 months or more after it has been deposited. In return for this withdrawal limitation, the financial institution pays a higher interest rate on such deposits than it does on its MMDAs. Also, a person can "cash in" a CD at any time but must pay a severe penalty.

money market mutual fund (MMMF)

offered by a mutual fund company. Such companies use the combined funds of individual shareholders to buy interest-bearing short-term credit instruments such as certificates of deposit and U.S. government securities. Then they can offer interest on the MMMF accounts of the shareholders (depositors) who jointly own those financial assets. The MMMFs in M2 include only the MMMF accounts held by individuals; those held by businesses and other institutions are excluded.

Securitization is so widespread and so critical to the modern financial system that economists sometimes refer to it as ......

Troubled Asset Relief Program (TARP),

which allocated $700 billion—yes, billion—to the U.S. Treasury to make emergency loans to critical financial and other U.S. firms. Most of this "bail-out" money eventually was lent out. In fact, as of March 2009, the Federal government and Federal Reserve had spent $170 billion just keeping insurer AIG afloat. Other major recipients of TARP funds included Citibank, Bank of America, JPMorgan Chase, and Goldman Sachs. Later, nonfinancial firms such as General Motors and Chrysler also received several billion dollars of TARP loans.

financial services industry

Wall Street Reform and Consumer Protection Act

This sweeping law includes provisions that:
Eliminate the Office of Thrift Supervision and give broader authority to the Federal Reserve to regulate all large financial institutions.
Create a Financial Stability Oversight Council to be on the lookout for risks to the financial system.
Establish a process for the Federal government to liquidate (sell off) the assets of large failing financial institutions, much like the FDIC does with failing banks.
Provide Federal regulatory oversight of mortgage-backed securities and other derivatives and require that they be traded on public exchanges.
Require companies selling asset-backed securities to retain a portion of those securities so the sellers share part of the risk.
Establish a stronger consumer financial protection role for the Fed through creation of the Bureau of Consumer Financial Protection.

Anything that is accepted as (a) a medium of exchange, (b) a unit of monetary account, and (c) a store of value can be ......

2.There are two major definitions of the money supply. M1 consists of currency and checkable deposits; M2 consists of M1 plus savings deposits, including money market deposit accounts, small-denominated (less than $100,000) time deposits, and .....

New money is created when banks buy government bonds from the public; money disappears when banks sell .......

Banks balance profitability and safety in determining their mix of earning assets and ......

Although the Fed pays interest on excess reserves, banks may be able to obtain higher interest rates by temporarily lending the reserves to other banks in the Federal funds market; the interest rate on such loans is the .......

monetary multiplier

(or, less commonly, the checkable deposit multiplier) defines the relationship between any new excess reserves in the banking system and the magnified creation of new checkable-deposit money by banks as a group

Commercial banks keep required reserves on deposit in a Federal Reserve Bank or as

Banks lose both reserves and checkable deposits when checks are ......

transactions demand for money.

asset demand for money.

People may hold their financial assets in many forms, including corporate stocks, corporate or government bonds, or money. To the extent they want to hold money as an asset, there is an asset demand for money.

reserve ratio

discount rate

Just as commercial banks charge interest on the loans they make to their clients, so too Federal Reserve Banks charge interest on loans they grant to commercial banks. The interest rate they charge is called the discount rate.

term auction facility

The Fed holds two auctions each month at which banks bid for the right to borrow reserves for 28-day and 84-day periods. For instance, the Fed might auction off $20 billion in reserves. Banks that want to participate in the auction submit bids that include two pieces of information: how much they wish to borrow and the interest rate that they would be willing to pay. As an example, Wahoo bank might want to borrow $1 billion and offer to pay an annual interest rate of 4.35 percent

The Fed has four main tools of monetary control, each of which works by changing the amount of reserves in the banking system: (a) conducting open-market operations (the Fed's buying and selling of government bonds to the banks and the public); (b) changing the reserve ratio (the percentage of commercial bank deposit liabilities required as reserves); (c) changing the discount rate (the interest rate the Federal Reserve Banks charge on loans to banks and thrifts); and .......

........(d) changing the amount of reserves it auctions to banks through the term auction facility.

Open-market operations are the Fed's monetary control mechanism of choice for routine increases or decreases in bank reserves over the business cycle; in contrast, changes in reserve requirements, aggressive changes in discount rates, and auctions of reserves are used ............

The Fed uses it discretion in setting the Federal funds target rate, but its decisions regarding monetary policy and the target rate appear to be broadly consistent with .........

cyclical asymmetry

Monetary policy may be highly effective in slowing expansions and controlling inflation but may be much less reliable in pushing the economy from a severe recession. Economists say that monetary policy may suffer from cyclical asymmetry

The Fed is engaging in an expansionary monetary policy when it increases the money supply to reduce interest rates and increase investment spending and real GDP; it is engaging in a restrictive monetary policy when it reduces the money supply to increase interest rates and.......

bribes

extortion

Explain the significance of culture for international business.

To be successful in their relationships overseas, international businesspeople must be students of culture. They must not only have factual knowledge; they must also become culturally sensitive. Culture affects all functional areas of the firm.

Discuss the two classes of relationships within a society.

A knowledge of how a society is organized is useful because the arrangement of relationships within it defines and regulates the manner in which its members interface with one another. Anthropologists have broken down societal relationships into two classes: those based on kinship and those based on free association of individuals.

Discuss Hofstede's four cultural value dimensions.

Geert Hofstede analyzed IBM employees in 72 countries and found that the differences in their answers to 32 statements could be based on four value dimensions: (1) individualism versus collectivism, (2) large versus small power distance, (3) strong versus weak uncertainty avoidance, and (4) masculinity versus femininity. These dimensions help managers understand how cultural differences affect organizations and management methods.

trade fair

Explain market indicators and market factors.

Market indicators are economic data used to measure relative market strengths of countries or geographic areas. Market factors are economic data that correlate highly with the market demand for a product.

Explain the difference between country screening and segment screening

If we utilize country screening, we assume that countries are homogeneous units (i.e., "everyone living in Mexico or Chad is essentially the same"). In segment screening, we focus our attention not on the nation as a homogeneous unit but on groups of people with similar wants and desires (market segments) across as well as within countries

trading companies

Explain the choice between market pioneer and fast follower.

A firm can succeed from any position, as the examples illustrate. In general, however, a follower is more likely to succeed if it has lots of resources. Smaller, less-well-financed followers are less likely to be successful

strategic planning

value chain analysis

An assessment conducted on the chain of interlinked activities of an organization or set of interconnected organizations, intended to determine where and to what extent value is added to the final product or service

Constraint

Discrete probability distribution

Expected value

A weighted average of the values of the random variable, for which the probability function provides the weights. If an experiment can be repeated a large number of times, the expected value can be interpreted as the "long-run average."

Branch

Optimistic approach

An approach to choosing a decision alternative without using probabilities. For a maximization problem, it leads to choosing the decision alternative corresponding to the largest payoff; for a minimization problem, it leads to choosing the decision alternative corresponding to the smallest payoff

Conservative approach

An approach to choosing a decision alternative without using probabilities. For a maximization problem, it leads to choosing the decision alternative that maximizes the minimum payoff; for a minimization problem, it leads to choosing the decision alternative that minimizes the maximum payoff.

Minimax regret approach

An approach to choosing a decision alternative without using probabilities. For each alternative, the maximum regret is computed, which leads to choosing the decision alternative that minimizes the maximum regret.

Game theory

Saddle point

A condition that exists when pure strategies are optimal for both players in a two-person, zero-sum game. The saddle point occurs at the intersection of the optimal strategies for the players, and the value of the saddle point is the value of the game.

Causal forecasting methods

Exponential smoothing

uses a weighted average of past time series values as the forecast; it is a special case of the weighted moving averages method in which we select only one weight—the weight for the most recent observation.